Making the most of your limited money involves more than just charting out how you'll spend your money. In fact, the heart of budgeting has almost nothing to do with numbers.
Budgeting requires you to take a long, hard look at your life. The way you spend your money ought to reflect your deepest values.
Budgeting, at its core, is the act of aligning your spending with your values.
Successful budgeting requires more than just filling out a worksheet. It requires setting priorities.
To do that, you'll need to ask yourself a few tough questions.
Learn more about keeping track of your many savings goals.
Question #1: What opportunities am I missing as a result of the way that I spend my money?
Let's assume that you really want to have another baby, but you and your spouse worry that you can't afford to raise another child. Or let's assume you have always wanted to visit your grandmother in France, or your relatives in Chile, but you worry about the cost of the airline ticket.
In short, let's assume there's something you'd "love" to do - a great opportunity - that you think you can't afford.
Are there major areas in your life where you're leaking money? Can you cancel your cable television service, downsize to sharing just one car, and start wearing secondhand clothes?
Can you install a 1.5 gallon-per-minute showerhead in your bathroom so that you can shave $10 - $20 off your water bill each month? Can you give up cigarettes or soft drinks?
These little budget trims may not seem like much -- $30 a month here, $60 a month there - but they can add up to hundreds per month.
If you can make little tweaks and trims to your spending habits so that you can save an extra $300 per month, you'll have $3,600 extra each year. That's a nice chunk of change for your 'biggest dreams' fund.
Learn more about budgeting more "fun" money.
Question #2: What does my current spending say about me?
If you haven't been tracking your money yet, one of the best ways to view your current spending is by taking an inventory of your possessions. Here are a few things to consider:
Clothes - How many shirts, pants, dresses and shoes are piled up in your closet? Do you have a huge collection of outfits? How often do you wear most of those clothes?
Try to mentally tally the value of everything in your closet. How much did it all cost? How much do you think you've spent on clothes and shoes over the past few years?
Your Home or Apartment - How much of your total pay does your home or apartment cost you? It's easy to make a rough estimate of this. If your rent is $800 per month, and you bring home $2400 per month after taxes, you're spending one-third of each paycheck on rent.
Is having a nice home worth one-third of your working hours? Does that align with your values? If the answer is yes, that's great. But if your answer is no, try searching for a cheaper place to live. Renting an apartment that's $600 rather than $800 means that you're only devoting one-fourth of your paycheck to your home, rather than one-third of it. That's like giving yourself an 8 percent raise.
Calculating the amount of your paycheck that you spend on housing is a little tougher when you own your home, because there are plenty of "incidental" expenses you need to take into account. On top of the mortgage, you're also paying for insurance, property taxes, repairs, maintenance, tools and services. Use a budget worksheet to see how much of each 8-hour workday you devote towards maintaining your home.
Dining Out - Do you only dine out on special occasions, or do you eat out multiple times a week? If you eat out frequently, you fall into one of two camps: You're either an avid food enthusiast who counts "dining out" as a legitimate hobby, or you're spending your money lavishly on something that's not important to you. Which one is it?
Learn more about savings on dining and entertainment.
The Bottom Line
The secret to strong budgeting isn't to get caught up in dollars and cents. The key is to align your values, dreams and desires with your spending habits.
Filling out a worksheet that shows you how you spend your money is an important first step, but it's only effective if it goes hand-in-hand with an honest assessment of how you want to spend your life.